The Energy Independence Illusion

Adapted and expanded from a presentation on "Energy Independence and Foreign Policy" to the World Affairs Council of Oregon, 3/28/14.

BACKGROUND

The roots of energy independence lie in the energy crises of the 1970s. US oil production peaked in 1970, and we became increasingly dependent on oil imported from the Middle East. In response to US support for Israel, OPEC cut production and doubled prices in 1973 and again in 1979. The economy stagnated for most of the decade, and Americans recoiled at the thought of the economy and foreign policy being held hostage by Arab sheiks.

Independence from these threats then became a key national objective. An effort was made to increase domestic exploration, develop alternative fuels, and conserve energy. Automobile gas mileage standards were increased, natural gas displaced oil in industry and home heating, and the generation of electricity from oil was phased out. The Strategic Petroleum Reserve was put in place as a buffer against supply disruptions, and the Carter Doctrine in the wake of the Iranian Revolution in 1979 declared that any threat in the Persian Gulf would be treated as an assault on the vital interests of the United States.

New discoveries in the North Slope of Alaska, the North Sea, and elsewhere in the late ‘70s took the steam out of OPEC. Within a few years oil prices returned to previous levels and our economy prospered. The pursuit of renewable energy was abandoned, a victim of declining energy prices.

In the 2000s conventional world crude oil supply stopped growing, and oil prices climbed steadily from $20 a barrel to more than $100. In response, horizontal drilling and fracking opened up hard-to-produce reserves from tight oil formations in North Dakota and elsewhere, reversing the 40-year decline in domestic production. Domestic oil production has increased from 5 mbd in 2008 to about 7.5 mbd in 2013. Similarly, natural gas production has increased by 20-30 percent over the same time.

Projecting this trend forward, some say the US will soon become the largest energy producer in the world, surpassing Russia and Saudi Arabia, and that we will soon be a net exporter. In addition there are proposals to build the Keystone XL pipeline to move oil from the Canadian tar sands to Gulf Coast refineries, build coal export facilities, and lift the oil export ban after 40 years. Looking further ahead, the International Energy Agency and BP project the US energy independence by 2035.

As in the 1970s, the purported benefits of energy independence are simple: an improved economy due to the reduced outflow of dollars, improved national security, and more flexibility on foreign policy, particularly with regards to the Middle East and now Russia. Those objectives are substantial, if they can be achieved.

However, drilling and mining our way to energy independence is a mirage. First, it may provide temporary economic gain, but will not cure our fundamental economic problems. Second, it will have very limited benefits for foreign policy and national security; the problem is not US dependence, but rather the dependence of our allies and trading partners. Third, it is simply unachievable. And last, it ignores carbon emissions; the real goal should be independence from carbon-based energy sources.

ECONOMY

Let’s look at the economy first. We currently import about 8 million barrels of oil per day, more than 40% of the oil we use. We pay about $1 billion a day for that oil, or $350-$400 billion per year. That represents more than half of our current accounts deficit. Increased domestic production reduces our current accounts deficit and should help strengthen the dollar. This is a real and substantial benefit, though not enough to turn around our economy by itself.

The RAND Corporation estimates that about 15% of our military budget—$83 billion of a total $518 billion—goes to protect access to oil in the Middle East. Would energy independence free us of that responsibility? Because of the quantity of oil in question and the dependence of our major allies, it’s likely that would maintain a strong presence there even if we were “energy independent.” There likely will be savings here, but probably not as much as one would hope.

Some sources believe that energy independence will mean lower prices for consumers. However, any increased domestic production will come from unconventional sources, such as shale oil or tar sands, which are more expensive than conventional oil. It only became economic to produce because of high world oil prices over the last several years. In addition, oil prices are tied to the world price of oil. Energy independence will not reduce consumer prices.

Most importantly, conventional world crude oil production has peaked, affecting the ability to grow the economy. This paradigm shift contributed to the fiscal crisis of 2008 and has dampened attempts to pull out of it. Unconventional oil is too expensive and its flow rates are too low to replace conventional oil or rejuvenate economic growth. No monetary or fiscal policies will reverse or overcome this fundamental choke on the global economy. The age of rapid growth is over. We are entering an era of slow or no growth.

Increased domestic oil production may help to stabilize the economy, or perhaps even to continue to grow it, albeit at a slower rate than in the past. But drilling or fracking our way to energy independence, while it may provide a temporary shot-in-the-arm, is not sustainable for long. Oil is a limited resource, and costs will only increase – either of which will prevent it from being our economic salvation.

While energy certainly affects the economy (energy costs above about 6 percent of GDP have been associated with economic recessions), it is not the only factor. Thomas Friedman’s book That Used To Be Us lists five pillars of prosperity going forward: education, infrastructure, immigration policy, government-funded R&D (which includes renewable energy), and financial regulation. Others have suggested additional or different factors. We have more to gain by investing in these issues rather than throwing more money into growing domestic oil production from finite and increasingly expensive unconventional sources. The latter is just throwing money down a rat hole.

Next, let’s look at foreign policy and national security. The argument is that energy independence will ensure that our national security is not jeopardized by oil price or supply problems emanating from abroad. It will also allow us more flexibility in foreign policy, especially in the Middle East.

OPEC hasn’t used oil as a political weapon in 35 years. They apparently recognize that embargoes and price spikes hurt them as well as importing nations. That’s not to say something couldn’t happen. The Gulf monarchies are aging and autocratic, and face upheaval sooner or later. If they are replaced by anti-Western radicals, world oil security will be destabilized and/or threatened. However, this is a danger to the world, not just to the US.

We prop up the Gulf monarchies. That may be distasteful, and one may wish it weren’t so. But if we withdrew, the alternative could easily be worse – not only for western energy security, but for terrorism, peace and stability around the region and beyond, and perhaps even for the prosperity of the region and hopes for democracy. It’s a case of damned if we do, damned if we don’t.

Second, the U.S. is relatively energy independent already. We are self-sufficient in coal and mostly self-sufficient in natural gas (we import about 15 percent of our natural gas from Canada). We do import about half of our oil – but our major suppliers are Canada and Mexico. Only a small portion is from the Middle East.

Europe and Japan are much more dependent on imports from Russia and the Middle East than the US is. Their security and prosperity likely would affect US interests more than any energy-related actions directed against us. But increased US oil production will not be enough to make ourselves energy independent, much less our allies. If we achieve energy independence and our partners and allies don’t, we are still vulnerable – both economically and in terms of national security and foreign policy.

Third, would energy independence give the U.S. more latitude on foreign policy? Let’s look at some specific cases.

· What about Syria? A major drought in 2006-2011 created food shortages and drove a million Syrians into neighboring areas. Sectarian tensions and the hope of the Arab Spring then lit this tinder. Syria has been mentioned as a possible route for a pipeline to move natural gas from Qatar to Europe as an alternative to Russian natural gas. That may have attracted some western interest, and it is possible that European dependence on oil and natural gas from Russia may have muted the West’s response. However, one of the US’ main interests presumably is to break Syria’s political alignment with Russia and Iran in hopes of alleviating its border dispute with Israel and the transport of weapons through Syria to Hezbollah. US energy independence wouldn’t make a fundamental difference, though European energy independence may have given them a chance to exert more influence.

· Egypt? One of the causes of the Egyptian uprising in 2011 was the loss of revenue as declining Egyptian oil production drove them to become a net oil importer. This caused food and gasoline subsidies to be cut, leading to steep price rises that people couldn’t afford. Egyptian energy independence would help, but not American energy independence.

· Would it help resolve the Iranian nuclear standoff? We have been independent of Iranian oil for 35 years. It was the economic, trade, scientific, and military sanctions that were successful in getting Iran to the negotiating table. US energy independence is irrelevant.

· What about 9/11? Osama bin Laden’s “Letter to America” listed US support for Israel, western interference in Muslim countries, and Western values as the main reasons behind the attack. Energy independence would have made little difference. It’s doubtful that US energy independence wouldhave affected our response in Afghanistan, since that nation possesses little oil.

· Energy independence wouldn’t do anything to help resolve the Israeli-Palestinian conflict, since neither side has any oil to use as leverage.

· What about Crimea or Ukraine? Russia provides a third of Europe’s oil and gas, so European energy independence might have made Russia think twice – but that’s not in the cards. In addition, Crimea and Ukraine are vital to Russian interests – Crimea is Russia’s only access to a warm sea port, and Ukraine is Russia’s major source of wheat and is a buffer against western encirclement of Russia. What could the West do differently if it were energy independent? Would it really risk military confrontation? Doubtful. Probably sanctions, just like now. European energy independence might make them more willing to endorse stronger sanctions; US energy independence is irrelevant as Russia only exports a small amount of oil to the US (under 4% of US imports and falling).

· Sen. Rand Paul’s response to the Crimean crisis would be to drill, drill, drill. Gen. James Jones, former National Security Advisor, says the Keystone XL Pipeline should be approved to signal to Putin that energy security cannot be used as a weapon. Those kinds of responses are pipedreams. The Eurozone imports 9 mbd. No amount of drilling or fracking will make the US energy independent, much less Europe. Meanwhile, the XL pipeline will move only 800,000 barrels of oil per day. These strategies aren’t exactly threats to Russia’s oil and gas exports, or leverage to curtail their ambitions.

· The only case where US energy independence might have made a difference was the two Iraq Wars, which were unquestionably about preserving access to the world’s second largest reserves. However, even there, the sheer quantity of oil at stake may have been too tempting to have prevented US intervention.

In summary, energy independence would do little to prevent or resolve foreign policy entanglement in the Middle East and elsewhere. In addition, our fate is intertwined with that of Europe, Japan, China and others – as they go, so go we. We have more to gain by modeling behavior and encouraging and assisting others to reduce their use of oil, than by trying to achieve energy independence for ourselves.

THE POTENTIAL OF ACHIEVING ENERGY INDEPENDENCE

Next, what are the chances of achieving energy independence? Is it even achievable?

Energy independence is an illusion. The current US energy boom is unlikely to power a shift from energy scarcity to energy plenty.

First, world production of cheap, easy-to-produce conventional crude oil has peaked. It has been on a plateau since 2005, declining slightly. Global production of conventional oil is declining about 6% per year. We need to replace the equivalent of Saudi Arabia’s production every 4 years. The large, easy-to-find deposits are generally discovered first, and we found those more than 50 years ago. The oil we’re finding today is from higher-cost unconventional sources – smaller deposits of lower quality oil in more remote locations and more complex geologic formations. We have to go into coastal waters many thousands of feet deep; or mine tar sands and heat them until the oil flows; or frack shale to liberate the oil and gas; or drill in the Arctic; or grow corn unsustainably to convert into a more-dilute ethanol fuel. Capital expenditures on drilling have doubled since 2000, but oil production has risen barely 15 percent. All of this just to offset declines from conventional fields, which are accelerating.

Fracking for light tight oil in North Dakota and elsewhere has increased US production from 5 mbd to about 7.5 mbd in the past five years. But the prospects for increased production from shale oil are limited. Decline rates of shale oil wells are 50% or more in the first year – much steeper than for conventional oil. That means we have to drill at an ever-faster rate just to keep up. And we’re producing the sweet, easy stuff first – it only gets harder. The US Energy Information Administration (EIA) projects shale oil to push domestic oil production another 2 mbd to a high of between 9 and 9.5 mbd by about 2020, declining after that. David Hughes, formerly with Canada’s equivalent of the US Department of Energy and now with Post Carbon Institute, projects shale oil topping off in 2016 at perhaps 1 mbd higher than today – good, but still far from providing us energy independence.

Regardless whose estimate you use, the US consumes about 19 mbd of oil. We currently import about 8 mbd. New fuel efficiency standards adopted by the Obama Administration should reduce consumption by about 2 mbd by 2025 and 4 mbd by 2035. However, even under the most optimistic forecast we would still have to import 6-7 mbd, about a third of our needs – and potentially more as population grows.

One telling sign about shale oil’s prospects is that the major oil corporations are not heavily involved. The drillers are primarily independent “wildcatters”, who have to finance these expensive projects with debt. If and when production declines, they could go under if they can no longer pay their debts.

Peak oil is not some crackpot idea. Peak oil is about flow rates, not how much oil is theoretically left in the ground. The US Joint Forces Command and the German military have issued reports acknowledging peak oil as an imminent threat. Deutsche Bank, Citibank, Swiss Re-Insurance, Merrill Lynch, and Toyota, among others, have also studied the issue and concluded it is real and will affect them. The only question is how steeply conventional oil production will decline and how much it can be offset by unconventional supplies. And while fracking helps domestically, it barely makes a dent in global supplies. US tight oil production and Canadian tar sands will have little or no effect in reversing or delaying global peak oil.

The peak of world oil production is intertwined with our current economic malaise. Energy fuels growth, and growth is what makes debt feasible and allows us to pay it off. So when energy production slows, prices rise and the economy slows as well, making it harder to pay debts. Combine the physical limit of stagnant world oil production with bad loans, derivatives, and other complex financial instruments that people didn’t understand, and you get mass default and a system-wide financial crisis.

The greatest threat, then, is not American dependence in a world of growing oil supply, but global interdependence in a world of shrinking supply. In the 1970s US oil was in decline, but global supply was still growing. Today, however, global supply has plateaued. Oil available for export is declining even faster as oil producers keep more for their own use.

As oil supply tightens, economies will struggle and nations will do what they can to solidify their access to remaining resources. This will cause tensions and create opportunities for conflict. We must do what we can to anticipate these problems and head them off. This may include international diplomacy allocating constrained oil exports in such a manner that would reduce competition and the potential for conflict. We cannot abandon our allies or cede the playing field to the likes of Russia, China, or Iran.

What about natural gas? Fracking has increased domestic gas production 25-30 percent in recent years, and long-term supplies are potentially more abundant than oil. Some sources estimate domestic unconventional gas supplies increasing significantly. For example, the IEA’s World Energy Outlook 2012 is able to project US energy independence by 2035 in large part due to an expected major increase in production from unconventional natural gas (fracking). However, decline rates for gas wells are even steeper than oil wells. One-third of gas production needs to be replaced every year. In addition, to help achieve energy independence, natural gas would have to displace imported oil, which is used primarily for transportation. While natural gas can be substituted in vehicles, we would have to double or triple our natural gas production. This is not very likely: our gas supply is not endless, and we’ll be tapping ever smaller and more expensive sources. As with oil, flow rates cannot be sustained. Natural gas may have a niche role to play as a transportation fuel in the short term, but mostly gas from fracking and other unconventional sources will replace declining conventional supplies for existing uses such as home heating and industry, and perhaps to displace coal in electric power generation. There is not enough, and we cannot produce it fast enough, to do everything we would like it to do.

Alternatively, some sources believe the export of liquefied natural gas (LNG) is in our future. In that case, LNG exports could offset oil imports and potentially make us energy independent on a net basis (i.e., disregarding the different uses of natural gas and oil). However, that would not necessarily reduce our vulnerability associated with imported oil, depending on the source of the oil. In addition, because of the uncertainty of supplies, infrastructure needs, assured markets, and environmental issues with fracking, the siting of LNG terminals, and the movement of LNG, LNG at best must be considered a long shot.

In summary, fracking for oil and natural gas will not make us energy independent. It will have modest economic benefits but won’t materially improve national security or flexibility our foreign policy. Both our economy and national security will still be interdependent with that of Europe, Japan, and other allies and partners, regardless how energy independent we are.

ENERGY INDEPENDENCE VIA RENEWABLES

Renewable energy is the other path to energy independence. Would renewables fare any better than fracking?

In terms of foreign policy, it would be about the same as described above for unconventional oil – it wouldn’t have much effect unless all our trading partners and allies were energy independent also.

Economically, renewable energy – like fracking – would keep dollars at home. In addition, like fracking, it wouldn’t be any cheaper for consumers – renewables tend to be dispersed resources that are relatively expensive to harness and consolidate into useful packets of energy.

However, renewable energy would have several other benefits. First, unlike fracking, it does hold the potential for energy independence in the long-term. Second, costs will only go down, whereas the cost of unconventional fuels will increase. Third, it creates a new growth industry for the long term, with local jobs as well as export opportunities. And fourth, it reduces carbon emissions instead of aggravating the problem.

However, renewables won’t get us to energy independence any time soon. It will take several decades to build them out, and we’re not exactly off to a fast start. It will require the effort equivalent to that of World War II, but sustained for the next 35 years rather than five years.

In addition, renewables primarily provide electricity and direct heat. They do not directly displace liquid fuels for transportation, which is precisely what imported oil provides. And anyone who thinks biofuels will ever be more than a niche fuel, much less scale up to displace imported oil, better get a reality check. We need to re-invent a transportation infrastructure and technologies that begin to move us away from oil.

CLIMATE

Of course, there is one other “greatest threat” that happens to be deeply intertwined with oil: climate change.

Carbon emissions are the 10 billion ton gorilla in the room that nobody is doing anything serious about. A big downside of increased domestic oil production is that it siphons investment away from development of renewable energy sources, and it increases greenhouse gas emissions. And even if we achieved enough efficiency and renewables to eliminate imports and become energy independent, it would still leave the issue of carbon emissions. More than energy independence, we need to strive for carbon independence.

If we don’t begin to deal with climate change now, it will eventually overwhelm our other foreign policy issues. Without international action to mitigate and adapt to climate change, we face a very disturbing future.

Climate change is already driving conflict, migration, and failed states. In both Darfur and Syria, long-term drought drove refugees in search of productive land and into conflict with neighboring populations. The increasing strength of hurricanes, triggered by more heat in ocean waters, has driven millions from their homes in the Philippines, Pakistan, and Central America. Where will climate refugees go? And what problems will that cause around the world – socially, economically, politically, and militarily?

Nor is the developed world immune. Drought and fires in Russia and Australia significantly cut wheat production. Here at home, cities from New Orleans to New York City have sustained major blows from extreme weather, and California and other parts of the US are enduring severe to extreme drought. After recent storms in the UK, the unmentionable subject of triaging coastal areas and putting efforts into protecting London has surfaced.

In the long run, carbon independence will be good not just for the US but for everyone. The countries that lead the way will be the moral, economic, and political powers of the nascent solar age – that is, if we can get there before we fry ourselves and while we still have the energy and financial resources to bootstrap the transition.

We need international agreement on how to reduce carbon emissions, and how to allocate the cuts among the developed, developing, and undeveloped nations. Since a process is already in place for this discussion, it should subsume my recommendation for international discussions on how to allocate declining world oil supplies – even though it has yet to yield much fruit.

But someone needs to lead. Presumably that would be the world’s leader, which is still the U.S., tarnished as we have become. Rather than opposing action, we should be driving negotiations, encouraging and assisting others, and leading by example. In fact, a prerequisite to international leadership is having a strong domestic policy.

Under the principle of first doing no additional harm, two of the biggest things we can do to move toward carbon independence are to stop the Keystone XL pipeline and the coal export terminals proposed on the West Coast. This would not only sequester some large and dirty carbon resources – it would set us on the path and send a signal that we are prepared to lead and to take the hard steps necessary to reduce emissions.

Other priorities should be shutting down all existing coal-fired power plants, and then figuring out how to transition from oil-based transportation to whatever comes next. Ultimately transportation probably needs to go electric, which can be derived from renewable resources. But it will mean a makeover of our infrastructure, from urban design and manufacturing to transportation and energy infrastructure.

A carbon tax would help drive the transition by giving consumers a more appropriate market signal. It would also induce entrepreneurs to innovate and invest in alternative products and technologies. We have a long way to go, and the transition needs to be mostly complete by mid-century.

CONCLUSION

There is nothing wrong or bad about energy independence per se. It has modest economic benefits, and doesn’t hurt national security or foreign policy (though the benefits are negligible). However, as I have shown, the purported benefits are typically overblown – energy independence is not a panacea for either the economy or national security.

The problem with energy independence is that it doesn’t go far enough. In any event, US prosperity and security are intertwined with that of Europe and Japan; if they remain energy dependent, the US economy and freedom of action cannot remain unaffected, even if we’re energy independent. Any level of energy independence must include at least our allies and trading partners (creditors, too?), if not the entire world. We cannot isolate ourselves.

Energy independence must not rely on fossil fuels; such an “independence “ is simply unachievable, and would be temporary even if it could be achieved. It would continue our dependency on a non-renewable resources that are increasingly difficult and expensive to produce, and which thus act as a brake on economic growth. It would also allow us to continue adding carbon to the atmosphere, imposing significant costs over the long term. Every dollar invested in chasing more fossil fuels is one less dollar for energy efficiency and renewable energy.

Energy independence through energy efficiency, energy conservation, and renewable energy would provide more economic opportunities and benefits over the long-term, and begin to reduce carbon emissions. However, if the goal is simply cost-effective use of efficiency and renewables, or energy independence conceived simply as eliminating oil imports, it allows carbon emissions to continue grow.

Energy independence, then, must be subordinate to hydrocarbon independence, which implies energy efficiency, energy conservation, and renewable energy. Achieving even hydrocarbon independence for and by ourselves would be a good first step. But eventually it must include the rest of the world, not just the US. Energy efficiency, renewable energy, and energy conservation (i.e., using less) are our best hopes for an independent and energy secure future.

4/29/14: The original post of this article incorrectly stated the amount of oil that the US currently imports from Russia.